A. Major Trends and Outlook

The outlook for 2003 and 2004 is for moderate growth and inflation, still heavily dependent on global economic recovery, moderate oil prices, and the results of macro-economic policies, notably in the U.S. and Europe. GDP increased at an annual rate of 1.2 percent in the first quarter of 2003. Recently the National Agency for Economic and Statistical Studies (INSEE) forecast an increase in GDP of 0.8 percent in 2003. Private sector economists revised their forecasts downward, agreeing that GDP growth would be lower than 1.0% in 2003 and no more than 2 percent in 2004. INSEE experts project an increase in unemployment from 9.3 to 9.6 percent between May and December 2003, and expect the unemployment rate to exceed the presumed structural rate of unemployment that is estimated at 8.5 percent, absent further significant liberalization.

The French economy continues to function below its growth potential, which is currently around 2.3 percent based on current population and technological trends. Reaching that potential will require further deregulation and reduction of the role of the state in the economy. With an absolute center-right majority in the National Assembly, President Chirac has more freedom to conduct reforms during his five-year term (trough 2007). He will face challenges. The GOF is currently struggling to reduce the budget deficit and to overcome public sector employees' resistance to pension reform and decentralization initiatives. The introduction of the Euro has increased competitive pressures on French companies and the French economy.

The GOF recognize the need for reforms and has indicated its intention to take action. Analysts, including those in the GOF, cite continued weak investment as evidence of the need to increase competitiveness through reforms, including further corporate tax cuts, simplification of administrative procedures, and increased research and innovation to improve France's competitiveness. The government has recently reiterated its intention to reduce taxes, and implement needed reforms both to improve competitiveness and increase economic growth. The political will of the GOF will be tested in the coming year as it contemplates the next phase of domestic economic challenges: reforming the tax structure and health insurance system, eliminating labor market rigidities, and scaling back the role of the state in the economy.

B. Principal Growth Sectors

In 2002 the five fastest growing sectors, as measured in real terms in the 1995 accounting basis, were education and health (4.3 percent), agriculture (3.7 percent), services to companies (2.1 percent), government (1.9 percent) and real estate (1.8 percent). As measured in nominal terms these sectors represented 12.1, 2.7, 16.6, 9.0, and 12.1 percent of total value added, respectively (2002 data).

C. Government Role in the Economy

France has a tradition of highly centralized administrative oversight of its essentially market-based economy. In 2002, total general government outlays amounted to 53.5 percent of GDP, one of the highest ratios among OECD countries. However, the idea of centralization is evolving as the government is working on a decentralization program dear to Prime Minister Raffarin that transfers many government responsibilities to the regions,"departements" and cities. The main objectives are to free the territories' energies, to eliminate redundant structures, and to make productivity gains at the national and local levels. In a first step, the Government revised the French Constitution on March 17, 2003 to authorize transfers of responsibilities to local authorities and to give them the legal means to carry out their new responsibilities. In a second step, the Government will organize the transfer of responsibilities to local authorities in fall 2003 (see www.premier-ministre.gouv.fr). Considerable progress has been made in privatization, although the government maintains a presence in industries such as aeronautics, defense, automobiles, and telecommunications, and can still exert control over privatized firms (see attached discussion of "golden share" provisions in section VII).

D. Balance of Payments

In 2002, France current account surplus increased to USD 26.0 billion or 1.8% of GDP. The USD 27.3 billion surplus in goods and services trade and the USD 12.9 billion income surplus were partially offset by a USD 14.1 unrequited transfers deficit. The goods trade surplus jumped to USD 9.6 billion due to a 3.5 percent decline in imports, only partially offset by a 1.5 percent decrease in exports. In 2002, France was the United States' ninth largest commercial partner, accounting for 2.6 percent of U.S. imports and exports. According to French Customs, France runs a small surplus (USD 0.3 billion in 2002), no longer a deficit, with the United States. U.S. Department of Commerce data continue to tell a somewhat different story, which is usually explained by the significant amounts of U.S. products that are re-exported to France from Dutch and Belgian ports, giving the U.S. a USD 9.2 billion trade deficit vis-à-vis France in 2002.

E. Trade Barriers

As a member of the European Union, France shares common external tariff, and, in many cases, non-tariff barriers with other members of the Union. Product safety and sanitary standards affecting imports into France are increasingly established at the EU level. The United States and EU have negotiated Mutual Recognition Agreements covering certain product standards that should ease entry into EU and French markets for U.S. firms. Despite occasional highly publicized disagreements, the sizable bilateral trade between the U.S. and France is for the most part, non-controversial.

G. Labor Force

France's private sector labor force is one of the country's strongest points in attracting foreign investment, combining high quality with relatively competitive unit-wage costs.

The labor code sets minimum standards for working conditions including the workweek, overtime, vacation and personal leave. Other labor standards are contained in collective agreements, which are usually negotiated by sector on a national or regional basis by the various unions and employers' associations. French absenteeism is modest by European standards and in the private sector peaceful labor relations prevail.

While the rate of unionization in France has steadily declined to about half that of the United States, French labor law provides an extensive institutional role for employee representatives and for organized labor. For example,

In companies with more than 10 employees, employee delegates are elected for a one-year term. These delegates are authorized to present individual or collective claims and grievances relating to working conditions to the management of the company, to inform government labor inspectors of any complaints under the labor law, and to concur with management in any reorganization of the workweek. Management is required to meet with employee delegates at least monthly.

· A company with more than 50 employees must have a joint management/employee enterprise committee, to which employee representatives are elected. The committee must be consulted for all major corporate decisions, but has no veto. The enterprise committee must be provided with the same information that is made available to shareholders. It is funded by the company at a rate equal to at least 0.2 percent of the firm's payroll and, uses this money to finance social and cultural activities for the benefit of employees.

Workers also hold most slots on occupational health and safety committees, which are mandatory in medium and large size companies. Labor tribunals (playing a role largely equivalent to the NLRB in resolving labor disputes) are comprised of equal numbers of union and employer representatives. Appeals are possible to the level of the “Cour de Cassation”, one of France's high courts.

H. Major and Third Country Competitors

As the world's fifth largest economy, centrally located within the European Union, there is strong competition for market share in all French industrial and service sectors. American exporters to France generally face more competition from European companies than from Asian ones, although Japanese companies have successfully established a foothold in the French market, primarily through investment. German companies tend to be strong competitors, building on the many Franco-German joint ventures. Each sector has its own characteristics and should be carefully analyzed as part of a strategy to capture a share of the French market.

I. Infrastructure Situation

France's transportation infrastructure is among the most sophisticated in the world, benefiting from advanced technology and extraordinary investment by the government. The three main entry points for airfreight are the Orly and Charles de Gaulle airports in Paris and Lyon's Saint-Exupery airport. France has twelve major seaports, many of which are equipped for container ships. There is also an extensive highway and river-transport system and a state-owned rail network that is among the most comprehensive and technologically advanced in the world.

Communications infrastructure is similarly advanced. Telephone lines blanket the country and there is easy access to the Internet via French and foreign service providers. The French "Minitel" telephone-based computer network is also widespread and provides many consumer services. France is behind the U.S. and some other countries in the use of personal computers and the Internet, but is catching up rapidly. High-speed Internet access is still limited, but should expand rapidly in 2002. The government is trying to promote better use of information technologies.

J. Major Infrastructure Projects Underway in France

· Charles de Gaulle-Roissy airport extension (estimated USD 2,300 million project) is nearing completion with the opening of Terminal 2E in June 2003.

· Lyon-Torino transalpine rail link (estimated USD 2,300 million project)

· Fast train project (TGV-Est) between Paris and Strasbourg, estimated
completion date: 2006

· Nice-Riviera Airport Terminal 2 extension project continues through
2003 (estimated USD 250 million project).